Vornado Realty Trust (VNO) Earnings Call Transcript & Summary

Thank you, everyone, for joining our first roundtable presentation. Welcome to Bank of America's 2026 Global Real Estate Conference. I'm Jana Galan, BofA's office REIT analyst, and we're thrilled to have with us today Vornado presenting. We have President and CFO, Michael Franco; Co-Head of Real Estate, Glen Weiss; EVP, Finance, Thomas Sanelli; and SVP, Investor Relations, Gary Hansen. Michael will start with a few opening remarks, and then we'll jump into Q&A. With that, I'll turn it over to Michael.

Can anybody hear me? There are people on the...

On the webcast.

If you webcast, I don't know if you did or not. You did. Okay. Sorry, yes. I'm just going to give a brief comment or two, and then let's jump right in the Q&A. I think everybody generally knows Vornado. What I would just say is I think if you look at where we as a company are now after the last 2 years, we're as optimistic and well positioned as we've ever been. We own about 28 million square feet. We have reshaped the portfolio to continue to add -- upgrade the portfolio from a quality standpoint, adding assets like Park Avenue Plaza, 623 Fifth. We're about to do at 350 Park. So we think we have the premier portfolio in New York City, both office and street retail. We'll talk about market fundamentals. They're arguably as good as they've ever been in my 37-year career. Certainly, there's -- they're better than they've been in 20-plus years and why it's going to stay that way. We have delevered our balance sheet over the last several years, continue to make progress there. We bought stock back. We'll talk about that as well, if you want. So I think we've done a number of positive steps. The stock has performed a little bit, retrenched here recently. And I think that it's sort of shocking given the fundamental backdrop where certainly New York City office stocks are trading. So why don't we jump into Q&A. The only other thing I'd say is, hopefully, all of you have been over the PENN District seen what we've done there over the last 6, 7 years, transforming that area of the city. I think it's remarkable. The results, I think, speak to the transformation, and we're still in the early innings there. So there's a lot more to come in terms of what those assets are going to produce and future opportunities coming out of PENN, and we couldn't be any more excited about owning that entire campus, which gives us the ability to unique things that you don't get by owning 1 or 2 buildings in a submarket. So Jana, with that, I'll turn it over to you.

That's great. And we'd love to kind of dive into the best operating environment in 37 years. If you could help us kind of understand that a little bit more, characterize the state of the New York City economy, the job market and then office market.

Let me start and then Glen should jump in here. I think it all starts with where does talent want to be, right? And talent, particularly young talent wants to be in New York City at a disproportionate level relative to every other city. And that gap has widened post-COVID. So I don't know how many you have college-age kids or know people have college-age kids. I happen to have two that have graduated. I've had 80% of their friends that weren't from New York now work in New York City. And that's generally the case with almost everybody. Now that doesn't mean they stay their entire lives, but they build their careers here and many times do stay. So talent wants to be here, companies recognize that. And you're seeing as a result of that strong broad-based demand. And I would say, as we sit here today, financial services, legal, accounting, tech, media, every sector is active and is growing, right? So driven by talent here, and therefore, the companies need to be here. You overlay that with for that -- for those companies to attract talent, they have to be in higher quality space in the right locations. That's generally around the two main transit hubs in New York, Grand Central and Penn Station. And they want to be in amenitized buildings. And so out of that, I think we've said a couple of times, 180 million square feet, you're looking at a vacancy right now that's tightened the point, particularly in the Plaza district, mid-single digits. So you have tight vacancy. You have strong demand, rents are rising. There's limited new supply, and it's extremely hard to build in this city, both from a cost standpoint, from a time standpoint. So this is not Atlanta. This is not Charlotte where you can slab up a building in 2 years, right? We know with certainty what's coming over the next 7 years, and it's not much, right? And so if the demand stays reasonably strong, by definition, you have to see meaningful rental rate growth, right? So that's why we're so bullish. Why don't you tack on in terms of what else you're seeing?

Look, I think Michael hit it all. I mean I've also never experienced this market in my career, and I've been at this for 3 decades also. Just on the street, tenants are growing exponentially and there's no space. So we're seeing huge growth within our buildings. We're seeing tenants in our buildings growing into other buildings we own because they can't grow where they are. CEOs want to be in New York period. As Michael said, the talent's here. And we track the better building segment, which is about 180 million feet, which is Class A, trophy Class A and new trophy and that vacancy rate is only 6%. And if you think about that vacancy rate in the upper half of the buildings, the towers, it's even less. I don't know the exact number, but it's probably 3% or 4%. So there's really no space. So we're all of a sudden seeing tenants battling for space in all of our buildings. And one thing we love about our portfolio specifically is our mix, where we have really done a great job expanding the Park Avenue subdistrict with a real stranglehold now with 623, Park Avenue Plaza, and 350 coming, the dominant PENN District portfolio where rents are rising daily. The rents are just out of control, up there now in a great way for us. 1290 has been an excellent performer, best building on Sixth Avenue. So we feel great about where we're sitting. We are working nonstop. It was the busiest August of my life. So we'll go to the next one, but it's bad news. Yes, exactly. Exactly.

Great. I guess about a year ago at this time, people were very concerned about the change in administration in the city. With the new mayor, just curious if there's been any notable changes on kind of the day-to-day operations or business? And any kind of new policies that you're watching that could potentially be positive or a little bit more challenging for the office market?

We've seen no change in behavior at all. We haven't lost any leases based on what John is saying. So nothing so far. I mean it's out there in the ether, so to speak. Everyone thinks about it. But so far, nothing at all that we're seeing on the ground.

I mean I love Ken Griffin's quote, right, that when all this was happening, my business is going to be here a lot longer than the administration, right? And I think that's how companies think, right? They're here long term. Again, the talent wants to be here regardless of who the mayor is, good, bad, whatever. And so companies are growing here. Big tech is growing more here than on the West Coast. Obviously, financial services is the center of the world. Legal is the center of the world, health care. If you want the best of the best, you come in New York City, right? And so we're not seeing any change in tenant behavior. I mean, if anything, as Glen talked about, we've seen companies growth accelerate over the last year. And that's happening whether person X is mayor, person Y is the mayor, right? Their businesses are driven by what's going on in the marketplace. So -- nothing that has impacted tenant demand. And I don't know that we're going to see it. Like the Pietà terror attacks got a lot of noise. I don't think that's changed any tenant's behavior and okay, you complain and then you move on.

Great.

And Citadel move forward with their commitment.

Well, I think the interesting thing about Citadel was if you look back to when we first announced the arrangement, which was in January of 2023. And at the time, the way we structured it, remember, this deal was negotiated in '22, world is in a different place, right? They thought that they wanted to proceed on a new building, but they weren't sure about 100% sure and growth plans, et cetera. We haven't designed the building yet, right? So we said, look, let's not force. Let's come up with a structure where both sides have effectively 8 years to decide to move forward. And if we want to get out at any time, we can put. If you want to never build, you can call and pay a premium, et cetera, et cetera, right? So anyway, it was pretty clear in the ensuing few months that they wanted to proceed. They were refining their plans. And so when we first signed up the deal in January 2023 was if the development went forward, they were committing to 850,000 square feet, right? Now we just -- the official exercise by Ken occurred last year, and then we had until August to make our decision, right? And so we exercised to participate in the venture. So at the time that we committed, Citadel had increased their lease square footage to 1.05 million, right? So they've grown 200,000 square feet additionally in that 3-year period, right? And we'll see. I'm not saying it's going to grow any more or not, but it's a juggernaut of a business, right? And these businesses, they don't sit around static every day. They're trying to conquer the world. And so there's a chance it may grow larger. But I just think in that time frame, not only just they commit, but they upsize their commitment over that time frame, notwithstanding all the noise, right?

And maybe since we started with 350 Park, just kind of any updates on demolition progress and possible 25% sale of the JV?

On the demolition, it has commenced and will complete in April. So we're coming down floor by floor on, I think, the 30th floor now. So by April, the building will be down, and then we'll start construction of the new tower. So all on schedule.

And what are you hearing from tenants, brokers in the marketplace.

I mean everyone wants to see what we're doing now. We're presenting actually tomorrow again. So we're definitely exposing the project, but we feel great about it. So he's taking the 1050 all in the bottom half other than 2 floors at the top for the executive center. So we have -- our speculative office block is perfect. It's floors 28 to 56, which includes some early option space where they could grow more so over the next couple of years. But we're in the tower with views of heaven in the world and the park, perfect floor place to 26,000 feet with 16-foot ceilings, no columns, perfection. But we're absolutely in no rush to lease that. It's only going to get better and better. But certainly, we're exposing it, we're presenting it, and we're talking to everyone who's out there. But really, that space, my guess is we'll wind up leasing to 1, 2, 3, 4 tenants. It won't be a big block user, but we'll see. So we're out there and the response has been 5-star unbelievable response to what we're doing.

And tenants are looking that far out already because they're out of space, right? So it's a balance of rent and committing. I would say in terms of the 25%, I'm not going to comment much on that. We'll get into when we close the transaction, we'll publish the economics. I'm confident you guys will be impressed. And I think as I think Steve talked about on the call, we're going to try to lay off a little bit, take a little bit of profit risk off the table and but still on a meaningful piece of the investment. That's the game plan.

I think on the call, Steve said $350 per square foot rent.

350 at $350. That's our marketing slogan.

Maybe if you can kind of talk about the -- your various submarkets, what are you seeing with rent growth, which are stronger than others?

Just on Citadel, what rights have they got in terms of what to detail, design issues? What do you control? What are they...

The heads-up partnership between us and Ken Griffin. They agree on everything. Ken Griffin personally is our partner. Citadel is the tenant. That's how the arrangement works.

And how that?

Mutual, right? It's heads up deal. There's things that relate just to Citadel, we control and if it's things just relate to Vornado, they control, as you would expect, right?

Finishes. I mean is this a...

Building is designed. There's nothing to argue at this point.

Okay. So it's not a vanity project where he's going to overspend.

No, no. Now Ken owns 60% of the building. He wants to make money, trust me.

He cares a lot about the spec space and the rents and yes.

I think actually one of the more -- not just interesting, but positive things is he has thought like a landlord the entire time, right? He constantly says, Glen, what should we do here? How do we maximize the value of the space, right? It's not thinking about -- obviously, he wants the building to be great for Citadel, but he's thinking about how do I maximize my 60% ownership stake. And Glen, if you tell me we need to put in this amenity, let's do it. If you tell me that this is not good, let's not do it. So he listened to the real estate professionals, and he's very focused on that 60% being very valuable.

[indiscernible] money?

Yes.

Great. Maybe chatting about submarkets.

I mean rents are rising everywhere, particularly for us in PENN. Rents are going up, up, up. At PENN 1, particularly right now, we've leased more than 200,000 most recently with rents running into the $120s. Similarly, at PENN 2, we have another 60,000, 70,000 feet of leases out in that same ZIP code of rents. So we're really churning very -- we're in fifth gear in PENN. Park Avenue, any space we could get back right now with 280 Park, we're getting back and those rents keep rolling up, up and up. As you know, Park Avenue is just tight as a drum. 1290 similarly, I mean we're seeing rents there in the bottom of the building now in the $90s which is unheard of based on historical rents that we and others have gotten, but you're going to be $97 a foot on the 6th floor at 1290, which is a huge rent. So it speaks, I think, to the market, but it also speaks to what we've done with these properties. The redevelopment at 1290 has been off the charts for us. Some of you have seen it recently on the town hall, the rooftop park. It's really -- we've leased over 600,000 feet off that project now. And of course, you've all been at PENN now. And it's really -- at this point in PENN, it's very natural state of affairs. People are coming, we're walking, we're touring and they just feel and experience the environment we created and everyone is loving it. So those submarkets are humming, Sixt, Park, PENN, but really the market overall is hitting on all cylinders. So rents are rising, free rents coming down and even TIs are starting to tighten. So it's certainly a landlord's market period. I mean, just clear at this point.

Just pause on that for a second. Glen, you were there early days, you came. I mean we used to get rents at PENN of $60, $65 a foot. We're basically double that now. And when we first published our yields, we thought we'd get, give or take, $90 a foot, right? So I think you're seeing a combination of obviously strong market and market acceptance of the submarket and product of what we've done. And notwithstanding that success, we're still at a discount to Hudson Yards, Manhattan West, so forth. Now we're not new, right? But our amenities are better and we're better located. And so that gap should narrow, we think, pretty dramatically over time. And so this is round one of sort of the redevelopment benefit, but we think there's a lot of room to run on the PENN assets as we roll those leases over time.

And you touched on gaining a little bit more leverage in negotiations with lower TIs. Can you maybe just comment on kind of where those are, how free rent? What are tenants looking for? What's going on with term?

I mean term is no issue. We're still in the 10- to 15-year range, no change at all on that. If anything, people want flexibility for expansion, more than I've ever seen because people are growing a lot. Net effective rents are up certainly in the high single digits, if not at 10% at this point, but net effective rents are up and keep going up every month. So everything is looking up. The arrows are up on everything, especially as supply keeps coming down and then the quality of that supply is really, really coming down quickly. The market is running very fast right now. So we're trying to look ahead every day. I mean we've been increasing rents over the past 3 months basically once every week or 2 in our -- always. We keep sitting down looking at our rent charts and increasing rents as we see things and just trying to stay ahead of the market as we're supposed to do.

How much interest and how much of your activity is on the early renewal side as the rental markets continue to...

More and more now. More and more, we're in a couple of those discussions with large tenants right now, which is -- gives us very good leverage on those negotiations. So that's a good point. Yes. Very much so.